Short sale of home might help to offset any capital gains

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November 30, 2008

Question: We recently sold our home in a short sale, which was a better decision than foreclosure. We paid $177,000 for the home, and we sold it for $130,000. We actually never had a chance to live in the house, but we did make payments for a year. Can we take a loss when we file our income tax?

-- V. M.

Montverde

Answer: It's likely the home would not be considered your personal residence as you never lived there. You should be able to deduct the $47,000 capital loss by offsetting any capital gain on a dollar-for-dollar basis until this loss is used up. But if you have no other capital gains to offset, you may only offset $3,000 per year of your regular income until the loss is used up. Because this was not your personal residence, you should have to pay federal income taxes on the amount of the forgiveness of debt. You should consult a CPA on your personal tax situation.

GREG VANDERGRIFT

Q: Through the years I have invested heavily in municipal, county and state tax-free insured bonds. In view of the recent difficulties with the insurance companies backing these bonds, would you please comment on the security of the principal in these bonds?

-- G.M.T.

New Smyrna Beach

A: The most secure municipal bonds would be those that carry a AAA rating on the bond and are also insured by a company that carries a AAA rating. Investors' services such as Standard & Poor's provide that type of rating information on municipal bonds and the insurers. The insurance is there to guarantee the repayment of the principal and interest in the event of a default by the issuer. Because you say you have invested heavily in these products, it is important to remember that no investment is without some risk.

MARK BOXMAN

Q: We own a second home in Georgia that we would like to sell. We purchased it for $90,000 four years ago, put $20,000 in repairs and have paid about $16,000 in interest on the mortgage. It is not used as a rental. We reside there about five to six weeks a year. We just take the standard deduction every year. If we sell it for approximately $200,000, what would we owe the IRS on this sale?

-- C.B.

Oviedo

A: This home was never a primary residence so there are no tax exclusions on any gain. You may be able to claim a cost basis of $110,000 as long as none of the $20,000 is considered usual maintenance and repair. (A new roof adds nothing to the basis, but a room addition does, for example). Using the facts you gave, you may be able to claim this as an investment property if real estate is not your usual business and pay capital gains tax on a sale this year at the 15 percent rate on a $90,000 profit for a $6,000 tax.